There has been a major global crisis, and your company’s board of directors has

Question

There has been a major global crisis, and your company’s board of directors has announced that the company is going bankrupt. No one could have seen this one coming. Your CEO has called you in to his office to start the insolvency process. Based on the latest published financial statements, your job is to come up with a plan that will be used to inform the company, its shareholders, and its creditors.

A. As your company’s controller, compose a summary report to your CEO advising him on the effects of the insolvency.

B. From a global perspective, what effects would the insolvency of your company have on the U.S. economy as well as the global economy (i.e., other countries)?

C. Construct a worksheet for the CEO showing the effects of the insolvency on the company, shareholders, and creditors.

Explanation / Answer

A. Effects of Insolvency - A summary report

B. Effects of insolvency in Global & US Economy :

Corporate insolvency may have the following effects on the economy

discouraging cross-border investment (particularly with respect to multinational companies or those with complicated financing structures), thereby reducing the efficiency of EU capital markets in general;

discouraging the timely restructuring of viable companies in financial difficulty, often resulting in a distressed company entering liquidation rather than restructuring as a going concern;

increasing uncertainty among issuers, investors and other stakeholders with respect to creditor recovery rates;

putting SMEs at a competitive disadvantage, as they generally do not possess the financial resources required to take advantage of more efficient restructuring procedures available in other Member States; and

making it harder to address the high levels of non-performing loans (NPLs), which absorb bank capital, reduce the efficiency of capital allocation, and represent a challenge to banking system stability.

C.

Insolvency worksheet for CEO

Worksheet

The purpose of the insolvency worksheet is to determine a company’s degree of insolvency as it relates to debt cancellation. The worksheet lists liabilities by type and assets by type. The fair market value of a business’s liabilities must exceed the fair market value of its assets for the business to be considered insolvent. If the worksheet totals zero or a negative number, the IRS considers the business solvent. A company must use the values of the assets and liabilities it had on the day it canceled its debt. Firms must omit any assets acquired after that date.

Short-Term Assets

The insolvency worksheet recognizes a wide range of short-term assets. This includes petty cash, undeposited checks and amounts sitting in bank accounts. Recognized current assets also include marketable securities -- stocks, bonds, mutual funds, annuity contracts -- certificates of deposit and any cash value an owner has in a whole life policy that protects his business. Security deposits also factor in. For sole proprietors and partners, current assets also include company-paid IRA accounts, 401(k) accounts and Keoghs.

Long-Term Assets

The worksheet recognizes several long-term assets as allowable assets. This includes real estate and real property owned by the business -- for example, office buildings, structures or land. It includes company cars and trucks, large equipment, machinery, furniture, computers and computer-related equipment. On a smaller scale, it includes tools. It also includes investments and interests in other companies -- for example, partnership interests in a general or limited partnership or membership interests in a limited liability company.

Cancellation and Insolvency

If the amount of insolvency equaled or exceeded the amount of debt that was canceled, the business can exclude the debt cancellation from its business income. If it does not, the business must include the amount as income on its business tax return. For accurate debt cancellation comparisons, companies must compare the amounts shown on the 1099-Cs with the amounts shown on their insolvency worksheet.

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